Wednesday, 16 August 2017

Take the people who
voted Leave because they believed there would be more money for the
NHS if the UK didn’t have to contribute to the EU. People, and
there were plenty
of them, who believed the £350 million a week figure. Should we
respect their vote by leaving the EU, which would mean considerably
less money available for the NHS?

And how about those
who voted Leave because they believed less immigration from the EU would mean they
had better access to public services. They can hardly be blamed for
voting that way, because plenty of politicians from the Prime
Minister downwards have told them that immigration is to blame for
pressure on public services. In reality reducing immigration would
almost surely reduce the money available for public services. So how are we
respecting their wishes by leaving the EU?

And those who voted
Leave because they were worried about being ‘swamped’. Not
because it was happening to them right now, but because they have read that it is going
to happen. When Turkey joins the EU. Or with all those refugees.
Because they read countless articles that scare them. The only
difference between this
example and others is that this is explicit in talking about ‘the
Muslim problem’. Do we honestly think that leaving the EU but
continuing with free movement is going to assuage their fears?

It is an awkward
truth that what many people wanted when the voted Leave is either simply impossible, or cannot happen without making everyone significantly poorer year after year. It is this reality that keeps the government in a fantasy world. Almost
no one who voted to Leave is going to be happy with the result of
government decisions. Those who wanted better access to public
services will not get it. Those who wanted more sovereignty will find
their sovereignty sold off cheap in a desperate attempt to get new
trade deals. Those who wanted less immigration will also find their
wishes largely frustrated because the UK cannot afford to reduce
immigration.

The parallels with the US are clear. The Republicans, after spending years denouncing Obamacare, found they could not
produce anything better. Those promoting Leave also did so without any thought to how it might actually happen, and therefore they have nowhere to go when confronted with reality. As a result, the government invents a magical
customs union so that Liam Fox can have something to do. I have never known a UK government look so pathetic.

This is why the lies
told by the Leave side are so critical. People tell me this is not
important because most elections involve politicians lying. I'm afraid this is exactly equivalent to saying that Trump is just another politician
who lies. It should be obvious that Trump and today's Republican party are something new and dangerous: people who tell blatant lies all the time about crucial issues and construct an alternative reality with the help of media outlets like Fox News. In exactly the same way, those in charge of Brexit live in their own imaginary world supported by the pro-Leave press. It is this imaginary world that they got 52% of the electorate to vote for.

That alone is enough to completely discredit the referendum as an exercise in democracy. But there is more. The debate we should have had during the
referendum was about the costs and benefits of immigration, This never happened because the person leading the Remain campaign had spent so
much of his political life stoking
up fears about immigration. It is hardly surprising that so many people voted to end free movement when both campaigns were united about immigration being a problem and way too high. The referendum campaign was like a boxing
match where one side tied one of his hands behind his back and the
other side brought knives.

Respecting the
referendum result means passing all this off as just normal. It is not normal. It is no more normal than Republican's taking health insurance away from millions. It is like an election held by an
authoritarian state that runs a xenophobic campaign and controls much of the means of information. In that case we would say that this authoritarian state respected democracy in only the most
superficial sense, and the same was true for the EU referendum.

We cannot say that
we should respect the right of people to make mistakes when the
information they were given was so untruthful. The people voted for
Trump and it is right to struggle to limit the damage and overturn
that result after 4 years. Those who struggle against Trump are not
disrespecting democracy but fighting to preserve it. In the same way
it is right to limit the damage the referendum vote does and reverse
it whenever that opportunity arises.

I understand those
who say that in today's political environment anything other than another referendum is politically
impossible. I understand
why it benefits the opposition to sit on the fence and triangulate.
[1] But please do not tell me that by being politically expedient in
this way you are keeping the moral high ground. [2] There is nothing noble in defending an exercise in democracy that was as deeply flawed as EU referendum. It is no accident that the only major overseas leader that supports Brexit is Donald Trump, and that those pushing Brexit hailed his victory. Brexit is our Trump, and the sooner both disappear the better the world will be.

[1] Although what is
the point of Labour hedging bets on keeping in the customs union? It
makes their Brexit strategy look much more like confused and
conflicted than strategic triangulation.

[2] It is very easy to tell the difference between political expediency and political conviction. Imagine the very unlikely event that parliament votes to end Brexit. Would you join demonstrations outside parliament calling this an affront to democracy, or would you breath a huge sigh of relief?Postscript 17/08/17 If you think that these lies were not important in influencing the result, then you should read what Dominic Cummings who ran the Leave campaign thinks: in particular the paragraph that starts "Pundits and MPs kept saying"

Monday, 14 August 2017

As the Global
Financial Crisis (GFC) and consequent recession were in progress, the
Labour government looked at how fiscal stimulus could be used to
moderate its impact. This would increase the budget deficit that was
already rising as a result of the recession, but they knew that
cutting interest rates alone would be insufficient to deal with this
crisis, and that you do not worry about the deficit in a recession.
That is Econ 101, i.e. basic macroeconomics, and it is 100% correct.

Here Osborne and his
advisors saw a political opportunity. Before the recession, fiscal
policy had been all about meeting the government’s fiscal rules
about debt and deficits, because monetary policy looked after
smoothing the business cycle. There had been much discussion about
the extent to which Gordon Brown had been fiddling these rules.
Osborne could therefore make political capital over the rising
deficit, particularly if he could suggest the deficit represented
fiscal profligacy rather than the result of the recession.

But what about Econ
101? The advice he was given (I suspect) was reflected in a speech
he gave in 2009. This gave a short account of the history of
macroeconomic thought, and described how the New Keynesian model
underpinned his macroeconomic policy. It said that in today’s world
the consensus is that monetary policy not fiscal policy dealt with
moderating booms and recessions. Yet it failed to mention that this
idea no longer worked when nominal interest rates hit their lower
bond. And that unconventional monetary policy was powerless in the
New Keynesian model. The speech was given a month after interest
rates hit their lower bound.

The speech also said
nothing about expansionary austerity, or the need to appease the
markets. That would all come later. This also suggests that Osborne's
focus on the deficit was a simple but devastating macroeconomic
error, a result of just not doing your homework. It was an incredible
error to make, as the fact that interest rates had hit their lower
bound was all over the financial press. If the media had been in
touch with academic economics they would have pounced on this black
hole in the speech. (Maybe this is complete coincidence, but his main
economic advisor
had previously worked at the IFS, where as I have said elsewhere they
do not do macro. [1])

As an economic
choice his policy was crucially out of date, but as a political
choice it was almost brilliant. The line he pushed on the deficit
came to dominate the media narrative, which I was later to describe
as media macro. It did not win the 2010 election outright, but it
went on to win the 2015 election. I say almost brilliant, because it
has proved the undoing of his successor. The economic damage done by
cutting government spending at the one and only time monetary policy
could not offset its impact was immense. I think it is no
exaggeration to call it the most damaging UK macroeconomic policy
mistake in my lifetime as an economist.

It was damaging in
part because politics drove two additional features of his policy
after he became chancellor in 2010. First, the austerity policy
would have had less economic impact if most measures had been delayed
until later into the 5 year term of the coalition government. But
that would have meant deep cuts before the next election, and Osborne
could see that would do political damage. Second, although the fiscal
rule did not require it, public investment was cut back sharply in
the first few years, because investment is often easiest to cut. As I
say in that 2015 post,
those cuts in public investment alone could have reduced GDP by 3%.

By 2010 you need to
introduce other actors who played a part in these mistakes. The
Treasury did what the Treasury unfortunately often does, and put
public spending control above the macroeconomic health of the
country. The Governor of the Bank of England pretended that losing
his main instrument didn’t matter, even though I’m told the MPC
had almost no idea what impact unconventional monetary policy would
have. If either institution had acted better perhaps the damage done
by the austerity policy could have been moderated, but we will never
know.

But the main damage
was done when the Conservatives were still in opposition. Did the
policy of opposing fiscal stimulus start off as a policy to reduce
the size of the state under cover of deficit reduction: what I call
deficit deceit? Or was it just something to beat Labour with: the
first in what proved to be a long line of bad economic judgements
simply designed to wrongfoot his opponents. Without the actors
involved telling us, I think it is impossible for us to tell. However
there are two things I think we can clearly say.

First, if it started
as ignorance rather than deceit, it turned into the latter as Osborne
prepared to repeat the policy all over again before the 2015
election, while at the same time cutting taxes. Second, if it started
as ignorance it is far too kind to call it a mistake. It is similar
to someone who has never learnt to drive taking a car onto the
highway and causing mayhem. It reflects a cavalier attitude to
economic expertise that has, I have argued,
its roots back in the early days of Thatcherism.

[1] This advice
served him well in other respects, such as establishing the form of
his fiscal rule (which would help limit the impact of austerity after
2011) and creating the OBR.

Friday, 11 August 2017

When people say
‘all politicians lie’, they cannot seriously mean they all hold
to the same standards of veracity as Donald Trump. But how do you
measure degrees of lying in politics?

Paul Krugman
suggests
that the Republican party’s problems began when they started
pushing the idea that tax cuts pay for themselves. The notion that
cutting taxes will bring in more rather than less tax revenue is a
theoretical possibility but has been shown by study after study to be
empirically false. But why was this lie worse than others?

I would suggest the
following. The lie became (and continues to be) a major plank of
Republican policy. We are not talking about being economical with the
truth with statistics to present a party’s policies in a more
favourable light. This lie was ultimately an attempt to legitimise
cutting taxes on the very rich, and reducing the size of the state
(because when the tax cuts did not pay for themselves the next step
was to cut spending to control the deficit). It was a lie that went
completely against expert opinion, and was at the heart of Republican
economic strategy.

Lying in this
fundamental way distorts the whole direction of political activity.
It and its supporters begin to focus on ways to hide the truth. It
means setting up think tanks whose aim is not just to push the party
line, but also to provide a counter-weight to, and therefore
neutralise the power of, real expertise. Such think tanks involve an
element of ‘pay us your money and we will push your interests’,
which is why right wing think tanks are the least transparent
about their funding. It also means using partisan media outlets to
present an alternative reality to voters.

If you can get away
with this, then why stop at one crucial lie. Politics becomes about
choosing the lies they can get away with that will promote their
cause. It is about what lies sound plausible to particular voters, or
what lies a partisan press can reliably sustain by selecting evidence
to support them. Lines between politics and journalism in partisan
outlets become
blurred.

We see the politics
of lying all the time in totalitarian regimes, or regimes that
control much of the mean of information. What I think has surprised
many is that two nations that pride themselves on their democratic
traditions and independent media can reach a point where the leader
and ruling party of one lies all the time, and the other undertakes a
huge constitutional change on the basis of a campaign where one side
lied
with impunity.
The Brexit campaign did not lie for the fun of it, but because it
would gain them votes, and what evidence
we have suggests their lies were believed.

It is not hard to
understand why these two longstanding democracies succumbed so easily
to the politics of lying. First, they tolerated the growth of a
partisan media that danced to whatever tune their owners played.
Second, the remaining non-partisan media placed even-handedness
between each side, the political horse race and entertainment above
informing the public and telling the truth. The Clinton email
controversy illustrated clearly a failure to apply any notion of
balance. Calling the £350 million a week figure ‘contested’ was
literally being economical with the truth. The BBC’s mission to
“inform, educate and entertain” has a secret caveat: informing
and educating does not include anything deemed political.

What I find
surprising is not just that this happened, but that the non-partisan
broadcast media has so little interest in doing anything about it. In
the US, when Trump complained about his coverage, CNN hired someone
nominated by Trump. In the UK the BBC sees no evil, and bats away
letters from the Royal Economic Society about its Brexit coverage as
just one more irritating complainant. Understandable given business
models and constant attacks on Fake News/Liberal bias by the
political right, but it means both countries remain wide open to the
politics of lying.Longer read on similar themes: Post-truth and propaganda

Wednesday, 9 August 2017

What do I mean by
this? Macroeconomists have many faults, but one clear positive is
that we think about systems as a whole rather than just one
particular component. One area where it is important to do this is in
thinking about what determines economy wide real wages. Take, for example, this
recent post
by the Flip Chart Rick. (His posts are brilliant and I try and read
every one, but unfortunately this one is too good an illustration of
the problem I have in mind.) He starts with this chart from the FT
that I reproduce below.

Why is the UK unique
in having a combination of negative real wage growth but positive GDP
growth? Now it just so happened that I had written a post
about this, explaining I thought pretty well the key reasons. But
Rick mentions none of these, but writes about a whole bunch of stuff
related to labour market structure and trade union power that I think
are largely irrelevant. I think he is making the same mistake that
people make when they say immigration reduces real wages, or that we
would all be better off if only unions were more powerful.

All these things are
important in influencing nominal wages, and perhaps the distribution
of wages between workers. But real wages also depend on prices, which
are set by domestic or overseas firms depending on where goods are
made. If nominal wages go up, prices are likely to go up.

So what do I think
accounts for the fall in real wages in the UK over the last decade?
We need to start with GDP per head rather than GDP: growth in the
latter has been boosted by immigration. Here is what has happened to
GDP per head over the last ten years.

GDP per head fell in
the recession, and then steadily but slowly recovered: the slowest
recovery in at least a century. To see how that is related to real
wages (using ONS average earnings divided by the CPI), which I call real consumer wages, we
first need to look at an intermediary measure: real product wages.
These are real wages divided by the price of UK output: the GDP
deflator.

This is an
interesting measure because its closely related to a simple identity relating GDP to labour income and profits. We can see that real product
wages have not changed very much over this period: the recession
mainly hit profits, or it created unemployment. (Real wages are wages
divided the number of workers, GDP per head is GDP divided by the
total population, which includes the unemployed.) But if we are comparing 2007 with 2015, real
product wages were as stagnant as GDP per head.

So why did real
consumer wages fall? That must be because consumer prices rose more
than output prices. There are two reasons why this happened in this
case: indirect taxes increased (remember the 2011 VAT hike), and a
large sterling depreciation during the GFC worked its way into higher
prices for imported goods. It is of course another depreciation after
the Brexit vote that is cutting real wages once again right now. As I
always try and stress, real GDP growth per head is not a good guide
to real income growth if the price of imported goods rise or the
price of UK goods sold overseas falls (what economists call a decline
in the UK’s terms of trade).

Real wage growth in
the UK has not been lousy because of lack of union power, immigrants
or higher profits, but because economic growth (properly measured)
has been stagnant, austerity included raising indirect taxes and we have now
had two large depreciations in sterling. [1] That is not to say that
these labour market factors are not important. At a macro level they
are important in keeping inflation low, which should have allowed a
more rapid expansion of GDP growth than we have actually had. That is
where fiscal austerity and Bank of England conservatism come in. At a
micro level labour market structure helps influence the distribution of earnings between
different labour groups. [2]

What I say about the
unimportance of profits is factually true for the UK over this
period, but it is not always the case. In the US and elsewhere we
have seen a gradual shift from wages to profits over the last few
decades. But even here it is not obvious that weak nominal wage
growth is the main cause, because in a competitive goods market lower
nominal wages should get passed on as lower prices. One explanation
that is attracting a lot of interest is the rise of superstar firms.
These firms make unusually high profits, or equivalently have low
labour costs, and if output is shifting towards these firms labour’s
share will fall. What these firms do with their profits then becomes
an important issue. More generally, it may be the case that
governments have become
too lax at breaking up monopolies, allowing a rise in the overall
degree of monopoly.

The consequence of
growing concentration, superstar firms and a rising share of profits
is that income derived from profit grows faster than income from
labour. I say derived from profit because I would include in this CEO
and financial sector pay, which in effect extracts
a proportion of profits from large firms. The net result is that most
of the proceeds of economic growth are going
to those at the top of the income distribution. But it would be good
if we could change that by making the goods market more competitive
and removing the incentive for CEOs to extract surplus from firms
[3], rather than by making the labour market less competitive.

Technical appendix

For those who are
lucky enough to have learnt economics using the Carlin and Soskice
text, this is a classic application of wage and price setting curves.
If workers become weaker, this shifts the wage setting curve towards
the (perfect competition) labour supply curve, reducing the
equilibrium real wage (unless the price setting curve is flat) but
increasing the equilibrium level of employment. An increase in the
degree of monopoly (the mark-up) shifts the price setting curve
further away from the perfect competition labour demand curve, which
reduces equilibrium employment as well as the real wage.

[1] One possible
caveat here is that low wage growth may have encouraged firms to use
more labour intensive production techniques, which has depressed
investment and productivity. But if we want to incentivise firms to
invest in more productive technology, increasing demand is a much
better method than increasing nominal wages.

[2] Another caveat. I'm not sure where the real wage data in the FT chart comes from, but the fall in UK real wages there is greater than you get by using the ONS average earnings data (which I have used), so it may be a different and more specific measure of real wages. In which cases labour market structure might be relevant in explaining that number, and I apologise to Rick in advance if that is what he had in mind.

[3] By, for example,
applying much higher tax rates on high incomes, or imposing a maximum
wage.

Monday, 7 August 2017

As regular readers
know, I have for the last few years been banging on about the
importance of the media in influencing public opinion. (It formed a
key part of my SPERI/News Statesman prize lecture.)
It is not a partisan point about whether the media is politically
biased in a particular direction. Instead it is a claim that the
media can and sometimes is profoundly important in influencing major
political events. I think it is fair to say that such claims are
often dismissed, particularly by the media themselves.

Take the Brexit
vote, for example. A general view is that it is down to a dislike of
immigration, but few people ask whether the concern about immigration
was to a considerable extent manufactured. The left has decided that
Brexit reflects the revolt of those left behind by trade and
technical innovation, largely ignoring the evidence that this was
only part of the story. You will find extensive studies of why the UK
voted to leave the EU, some of which I reviewed here,
but none to my knowledge look at the influence of the tabloid press.
Although my own immediate reaction
to the vote put the press at centre stage, I faced a problem that
anyone who blames the media faces. How do you prove that the media
are not simply reflecting opinion rather than molding it?

We are now seeing
studies that attempt to get around that problem by looking at what
economists call natural experiments. The most well known
found that “Republicans gain 0.4 to 0.7 percentage points in the
towns which broadcast Fox News”. Here
is another that argues that the media has combined with special
interests to misinform voters about climate change. The evidence that
the media does not just reflect but also influences voter opinion is
mounting up.

I argued in a post
immediately after the 2017 election that this event also showed how
powerful the media’s impact was in the UK. Since the second Labour
party contest in 2016 until shortly before the 2017 general election,
the public’s view of both Corbyn and the Labour Party was largely
intermediated by political journalists. The polls showed that labour was unpopular and Corbyn even more so. During the general election campaign, both
Corbyn and Labour gained direct access to voters. The popularity of
both surged.

Now it is possible
that both Corbyn and the party underwent some huge transformation in
those election weeks: the manifesto surprised everyone by including
popular measures, and the party surprised everyone by being totally
united behind it. I just do not believe this can account for the
extent of the surge we saw. A much more likely explanation is that
Corbyn and Labour had been portrayed by the media in a negative light
until the election.

It might be tempting
to suggest exactly the opposite: that the Labour surge shows the
diminishing power of the Tory press. However, as Roy Greenslade
notes,
these papers are mainly read by the old not the young. Furthermore, among
those aged 65%+, the share of Labour voters between 2015 and 2017 was
unchanged. Instead the Labour surge showed not only the importance of
social media, but also how the broadcast media can have considerable
independent influence when it does not follow the Tory press.

The Corbyn surge
need not reflect any deliberate anti-left bias, but just a
self-reinforcing process. The disunity within Labour until the second
leadership election had a large negative impact on the polls.
Political reporters took these polls as evidence that Labour and
especially Corbyn could not win, and this influenced the way both
were reported until the general election. Pretty well everyone,
including myself [1], took the pre-election unpopularity as
reflecting informed voter opinion rather than an impression largely
manufactured by media coverage.

The Labour surge was
also a reflection of May’s awful election campaign. But exactly the
same points can be made here. May did not suddenly become robotic and
unresponsive during the campaign. The serious faults that were
portrayed then were also clearly evident in the year before, and
during her time at the Home Office. But rather than investigate
these, political reporters chose to focus on the polls and believe
that her position was impregnable.

Gary Younge has
described
the failure to at least investigate the possibility that Corbyn might
gain in popularity during the election as “the most egregious
professional malpractice”, but as far as I can see he is virtually
alone among journalists in thinking how the Labour surge might
reflect on their own reporting. Instead the tendency has been to
focus on the inadequacy of the polls (which is quite unfair because
the differences in the polls largely reflected quite understandable
different views about expected turnout among younger voters) and more
generally journalists failure
to predict the result.

Indeed I think
Younge understates the lessons of the surge. If the media was able to
convey a largely false impression of Labour, Corbyn and May before
this election, it seems reasonable to suppose that there have been
other episodes where the media has had a large influence. The list in
my lecture cited above could just be scratching the surface. This
potential power often used without awareness or responsibility breeds
mistrust, as Andrew Harrison relates here.

One of the
unacknowledged problems in the broadcast media is the perpetual focus
on Westminster, which was one of the factors that led to discounting
Corbyn. Which naturally leads us to Brexit. I’m constantly told
that any challenge to the referendum has to wait until public opinion
turns. And looking at all the facts available it should turn: real
wages are falling and output is stagnant as a direct result of the
Brexit decisions, there will be less rather than more money for the
NHS, and so on. But we should have learnt from the 2015 general
election that this kind of simple economic determinism does not
always work. Then real wages had fallen by much more, we had the
worst recovery from any recession for at least a century, and the
Conservatives won on the basis of economic competence.

The Westminster focus means that on Brexit the 48% get largely ignored. The right wing media that gave us Brexit are continuing
to mislead as they always have. On the broadcast media that most
people watch, there is no one championing a second referendum.
Instead the presumption is that Brexit has to go ahead because
‘democracy’ demands it. There is the danger the media that
created Brexit will sustain Brexit, just as the media sustained a
view that Corbyn was hopeless and May was
masterful until people had direct access to both. As a result, those
pushing the idea that a second referendum should only be held if the
public demand it are in danger of being as naive about the power of the media as those
who wrote off Corbyn’s chances

[1] To some extent
this was, I’m afraid to say, a classic example of not having faith
in my own ideas. But I was also surprised at how quickly the
broadcast media was able to swing from Corbyn bashing to focusing on
May’s inadequacies. The problem the Conservatives and their press
backers had was that scare stories about Corbyn were ‘old news’,
whereas seeing the Conservative election machine fall over itself was
a new experience, and therefore far more newsworthy. But, once again,
this poor performance was also very clear from various decision taken
in Downing Street in the year before.

Friday, 4 August 2017

Those who suggest
that Brexit is of second order importance to getting a Labour
government need to think about what that government will be able to
do and how long it will survive if we leave the Single Market and
customs union. The OBR did a rough and ready estimate of the near
term impact
of Brexit [1], and concluded that productivity growth would fall
(which means lower GDP and real wage growth) and the government
deficit would deteriorate by around £15 billion by 2020. That sum is
about a third of the current defence budget, or a tenth of the entire health care budget.

It is simply wrong
to imply that this can be ignored, because Labour is anti-austerity.
That large deterioration in the deficit due to Brexit is mainly the
result of low productivity and less immigration, not the consequence
of an economic downturn. It cannot be undone by the government
spending more on infrastructure: public investment is not some magic
instrument that can get you any GDP you want.

No economic theory
that I know of suggests you can safely ignore the public finances
outside of a recession. In a world where monetary policy regulates
demand (absent the lower bound) then a build up in government debt
risks crowding out private capital, discouraging labour supply
(because higher debt has to be serviced through higher taxes) and
redistributing income between generations. This is why Labour’s
fiscal credibility rule aims to balance current public spending
outside of a recession. Every £billion lost to Brexit is a £billion
that cannot be spent on public services, or has to be raised in
taxes.

The same logic meant
that Labour’s election manifesto in 2017 had a large increase in
current public spending entirely financed by higher taxes. Their
programme is anti-austerity because their fiscal credibility rule
would do the opposite of what Osborne did in 2010 if interest rates
were at their lower bound. It also sensibly allows public investment
to rise when borrowing costs are so low. But once interest rates
begin to rise, the Labour government would have a current deficit it
needed to finance, and its difficulty in doing this would be made
much worse by Brexit. [2]

In all this it is
vital to not be distracted by some of those who see Brexit as an
opportunity for Corbyn-bashing. Those that do so seem to forget two
key points. First, the attitude of a large number of Labour MPs in
Leave voting areas is just as much of a problem as the views of the
leadership. Second, there is a purely political argument
for Labour being just a bit less supportive of Brexit than the
government right now. My own view is similar to this discussion
by Mike Galsworthy.

However I feel I
have to end by responding to a second post
from Owen Jones. Let me do so by imagining the following scenario.
Suppose the Conservative leadership changed, and the new leader said
this on being elected: “we tried as hard as we could to respect the
result of the referendum, but we found there was no way of doing so
without causing the economy great harm. As a result, I have
regrettably decided to revoke Article 50, and remain in the EU.”
What should Labour’s response to that be? The logic of Owen’s
position is that Labour should oppose this, and side with the Hard
Brexit faction of the Tories and defeat the new Tory leader.

A highly unlikely
scenario I agree, but it helps establish this point. Owen, unlike
many Corbyn supporters, is not arguing that Labour should remain
pro-Brexit while in opposition as simply a strategic move to gain
votes. He is saying that Labour has to support leaving the EU because
of the referendum demands it. Indeed he says anyone arguing otherwise because the referendum was advisory is “beyond
delusional”: It seems I have become a beyond delusional ‘Hard
Remainer’.

Does democracy mean
being bound by a referendum that was called only to appease the hard
right, decided by lies using a rigged electorate, and apparently made
mandatory as a result of the words of a now departed Prime Minister? Is
it a democracy when we are unable to change course because new facts
clearly deviate from promises made, resulting in a decision that
imposes costs on the young largely as the result of votes by the old?
These are difficult questions, but not delusional questions.

I doubt it will
happen, but would ignoring the referendum destabilise democracy? Let
me turn the question around. If the final Brexit deal involves
staying in the Single Market and therefore accepting free movement,
will that destabilise democracy? The number of people who voted
Brexit but wanted to stay in the Single Market may be more than 2% of
the population, but it is bound to be small. There will therefore be
plenty of people who will say that accepting free movement ignores
the referendum, and plenty of aggrieved voters to back them up. Is
that going to produce a reaction which is very different from the
reaction to actually ignoring the referendum?

The hard truth is
that any deal which avoids serious economic costs for the UK is going
to make most of the 52% pissed off. And they will remain pissed off
until either we reduce immigration, with the economic costs that will
bring (less schools, less hospitals, higher taxes), or senior
politicians start being honest about the benefits of immigration.

[1] Stupidly, the
OBR were not asked to estimate the impact of Brexit before the
referendum, and their mandate prevented them from doing so themselves.

[2] And please no
MMT inspired comments about how taxes are not needed to finance
spending. The MMT world is very different from our current world:
fiscal policy rather than monetary policy regulates demand. In that
case you never worry about the deficit, but spending is constrained
by inflation.

Wednesday, 2 August 2017

Recessions and milder economic downturns are
typically a result of insufficient aggregate demand for goods. The
only way to end them is to stimulate demand in some way. That
may happen naturally, but it may also happen because monetary
policymakers reduce interest rates. How do we know we have deficient
aggregate demand? Because unemployment increases, as a lower demand
for goods leads to layoffs and less new hires.

A question that is
sometimes posed in macroeconomics is whether workers in a recession
could ‘price themselves into jobs’ by cutting wages. In past
recessions workers have been reluctant to do this. But suppose we had
a more prolonged recession, because fiscal austerity had dampened the
recovery, and over this more prolonged period wages had become less
rigid. Then falling real wages could price workers into jobs, and
reduce unemployment. [1]

This is not because
falling real wages cure the problem of deficient aggregate. If
anything lower real wages might reduce aggregate demand by more. But
it is still possible that workers could price themselves into jobs,
because firms might switch to more labour intensive production
techniques, or fail to invest in new labour saving techniques. We would
see output still depressed, but unemployment fall, employment rise
and stagnant labour productivity. Much as we have done in the UK over
the last few years.

It is important to
understand that in these circumstances the problem of deficient
demand is still there. Resources are still being wasted on a huge
scale. Quite simply, we could all be much better off if demand could
be stimulated. How would central bankers know whether this was the
case or not?

Central bankers
might say that they would still know there was inadequate demand
because surveys would tell them that firms had excess capacity. That
would undoubtedly be true in the immediate aftermath of the
recession, but as time went on capital would depreciate and
investment would remain low because firms were using more labour
intensive techniques. The surveys would become as poor an indicator
of deficient aggregate demand as the unemployment data.

What about all those
measures of the output gap? Unfortunately they are either based on
unemployment, surveys, or data smoothing devices. The last of these, because
they smooth actual output data, simply say it is about time output
has fully recovered. Or to put it another way, trend based measures
effectively rule out the possibility of a prolonged period of
deficient demand. [2] So collectively these output gap measures provide
no additional information about demand deficiency.

The ultimate arbiter
of whether there is demand deficiency is inflation. If demand is
deficient, inflation will be below target. It is below target in most countries right now, including the US, Eurozone and Japan. (In the UK inflation is above
target because of the Brexit depreciation, but wage inflation shows
no sign of increasing.) So in these circumstances central bankers
should realise that demand was deficient, and continue to do all they
can to stimulate it.

But there is a
danger that central bankers would look at unemployment, and look at
the surveys of excess capacity, and look at estimates of the output gap, and conclude that we no longer have
inadequate aggregate demand. In the US interest rates are rising, and
there are those on the MPC that think the same should happen here. If
demand deficiency is still a problem, this would be a huge and very
costly mistake, the kind of mistake monetary policymakers should
never ever make. [3] There is a fool proof way of avoiding that
mistake, which is to keep stimulating demand until inflation rises
above target.

One argument against
this wait and see policy is that policymakers need to be ‘ahead of
the curve’, to avoid abrupt increases in interest rates if
inflation did start rising. Arguments like this treat the Great
Recession as just a larger version of the recessions we have seen
since WWII. But in these earlier recessions we did not have interest
rates hitting their lower bound, and we did not have fiscal austerity
just a year or two after the recession started. What we could be
seeing instead is something more like
the Great Depression, but with a more flexible labour market.

[1] Real wages could
also be more flexible because the Great Recession allowed employers
to increase
job insecurity, which might both increase wage flexibility and reduce
the NAIRU. Implicit in this account is that lower nominal wages did
not get automatically passed on as lower prices. If they had, real wages would not fall. Why this failed to happen is interesting, but takes us
beyond the scope of this post.

[2] They also often imply that the years immediately before the Great Recession were a large boom period, despite all the evidence that they were no such thing outside the Eurozone periphery

[3] J.W. Mason has
recently argued that such a mistake is being made in the US in a
detailed report.

Monday, 31 July 2017

A constant refrain
from politicians and others is that we have to leave the EU because
we have to respect democracy, where by democracy they mean that 52%
voted to do so. Arguments that the vote was based on lies by the
Leave side are met with dismissive remarks like both sides were the
same, or what do you expect from politicians and so forth. The
important thing, we are told, is to ‘respect democracy’.

In Poland the
government recently passed a law which will dismiss all existing
judges and allow the state to directly appoint their successors. This
government was democratically elected, and the plan was in their
manifesto. So why did the Polish President veto
the plan, and why was the EU deeply concerned
about it? Surely there was a clear mandate for this policy? Shouldn’t
the President and the EU respect democracy?

The reason why the
President and the EU were right is that democracy is much more than
having elections or referendums every so often. Checks and balances,
and the rule of law, are crucial ingredients of a well functioning
democracy. But having an independent judiciary is not the only
essential characteristic of democracy besides voting.

I personally think
an important part of democracy is that politicians do not base
campaigns on complete lies, and that knowledge, evidence, facts and
expertise are respected and are easily accessible to all voters.
Otherwise elections can be won by those who tell the biggest lies. If
this happens and is not remedied democracy is a sham. As I noted
here, lies were central to the Leave campaign (more money for the
NHS, Turkey about to join the EU) and have already been shown to be
untrue, while the central plank of the Remain campaign (dubbed
Project Fear by Leave) has already come to pass. Polls suggest the
Leave lies gained
them votes. Only one side in the campaign spent a large amount of
time dismissing or denigrating academic expertise (be it economists
or lawyers).

In the US the
Republicans control Congress and the White House, all won by
democratic elections where a key part of the Republican platform was
repealing Obamacare. The Republicans therefore appear to have an
overwhelming democratic mandate for this repeal. So why are so many
people protesting against this repeal? Isn’t it important for
democracy that repeal goes ahead?

You may say that the
Republicans did not say how they would repeal Obamacare, but
neither did the Leave campaign say how they were going to leave the
EU (or rather they said whatever people wanted to hear). You may say
that Leave voters will lose their faith in the democratic system if
Brexit doesn’t happen, but the same is surely true for Republican
voters if Obamacare is not repealed. That is hardly a reason to do
it.

But referendums are
not like elections, we are told. Mandates from elections can be
challenged but referendum results must be respected. But where is it
written that referendum results (particularly those that are so
close) can never be challenged? Where is it written that we must be
bound
by the words of politicians during the referendum.[1] If it turns out
that the claims of one side in the referendum have been shown to be
false, where is it written that the referendum result should
nevertheless be cast in stone for a generation. The answer is
nowhere, and for the good reasons that David Allen Green explains.
All that is written is that parliament is sovereign.

People overseas, in
the EU or outside, are mystified at what the UK is currently doing.
The main supporter of Brexit overseas is an authoritarian regime,
which should give you a clue about what is going on. There are two
overwhelming reasons for challenging the referendum result: it was
arrived at after a deeply flawed campaign, and we now have
information that clearly shows the extent of the Leave campaign's
lies. The Leave campaign abused democracy before the vote with lies,
and then abused the word subsequently
to stifle any dissent. When a vote is won narrowly in an election
based on lies that have now been exposed, it seems to me a hallmark
of a functioning democracy is that the original vote is challenged
and voters have a chance to vote again.

[1] We could add
whether we should be bound by an electorate chosen
to keep Brexiteers happy.

Friday, 28 July 2017

In the contest
between economists and Brexiteers, which I last visited here,
the score was 5:0 and Brexit supporters were already leaving
the ground. But in that total I had not counted the 2017 Q1 GDP
figure, because it could have been a statistical blip. We now have
the first estimate of Q2 growth. I’m afraid the economists have
scored again.

You may remember
that Brexiteers made an awful lot of fuss when growth in the second
half of 2016 was mediocre [1] rather than plain bad. We now know why
that was: consumers were borrowing and running down savings. That is
not a source of sustainable growth. Growth in the first half of 2017 (2017 H1) has been virtually non-existent. As this chart shows, we have not
seen such slow growth since before the 2013 ‘recovery’ period.

What is more, what
little growth there was in 2017 H1 seems to be coming from consumption due to
more borrowing, which is worrying for the future. (We will know more
when the expenditure breakdown is released with the second estimate.)
Those who argued that Brexit would bring a short term slowdown have
been proved right: they just got their timing slightly wrong. Have
all those who earlier lambasted forecasts of a short term Brexit
slowdown offered their apologies? Pigs will fly.

Yet in his press
release when the figures were announced, Labour’s Chancellor in
waiting John McDonnell mentioned
the government’s austerity policy but not Brexit. This is
surprising, but how do we know whether austerity is to blame for this
slowdown or Brexit?

The answer is both are to blame.
After a pause, fiscal policy (to judge from the OECD’s estimate of
the underlying primary balance) started taking demand out of the
economy in 2015 and particularly 2016. That will have been an
important factor behind the slow growth in both years. However the
additional slowdown in the first half of 2017 is likely to be a
Brexit phenomenon.

For those who say
Brexit has not happened yet, the mechanism is clear. The Brexit
depreciation immediately after the vote has led to a fall in real incomes, meaning less
consumption. It has not led to any compensating increase in exports
because firms are not going to expand markets that might soon
disappear because of leaving the Single Market or customs union. The
Brexit depreciation has brought forward some of the negative impacts
of Brexit on living standards.

Yet austerity is
still to blame in the following respect. The Brexit slowdown in 2017
H1 is a slowdown in demand, not supply. Monetary policy did what it
could after the Brexit vote, but with interest rates at their lower
bound it can do no more. (I trust
there are some very embarrassed faces on the MPC right now among
those suggesting a rate rise.) Fiscal policy should have helped
monetary policy out by filling the demand gap, but those running the
Treasury refuse to acknowledge this role for fiscal policy.

So McDonnell is
correct to blame austerity, but his failure to also blame Brexit I’m
afraid reflects darker political motives. The silence on Brexit as a
cause of the current stagnation is because Labour, like the
government, supports Brexit. No one wants to say that the Brexit vote is already causing considerable damage.
Just like courtiers to a monarch, no one dares tell the king (the 52%) the bad news that their decision have brought harm in case the king takes his anger out on the messenger (the political parties).

[1] Growth in Q4 was
just below historic trends, but growth in Q3 was way below. Hence
mediocre.

Wednesday, 26 July 2017

Owen has written a
very clear account
of why he supports the referendum result, even though he campaigned
against it. He is, to use one terminology, a ‘re-leaver’, and as
he points out there are many like him. He is quite right that those
advocating overturning the referendum result have devoted
insufficient attention to this group. However I think in key respects
his argument is wrong.

I think it is
helpful, as I have done before, to set this debate in the context of
future decisions that may realistically face MPs. I can see four:

Having left
in 2019, we are likely to remain in the Single Market and customs
union while we negotiate some kind of trade agreement to allow us to
leave one or both. The first decision, which could face an incoming
Labour government, is should those negotiations continue or be
abandoned.

Owen does not
explicitly address the Single Market, which is surprising. In my
view leaving the EU but staying in the Single Market (the ‘Norway
option’) is what Labour should choose to do if it gains power. That
is fully consistent with respecting the referendum result. Those who
say that the referendum was about immigration and therefore we have
to end freedom of movement commit a simple logical error. A majority
(those who voted Leave because of immigration) of a majority (52%) is
not necessarily a majority. There is no mandate of any kind for
leaving the Single Market.

During the
vote on whether to leave in 2019, there is a vote to hold a second
referendum where the choice is to accept the deal or remain in the
EU.

Again he does not
directly address a second referendum, but some of his arguments are
relevant to it. You could argue that holding a second referendum
would disrespect the first. If the Brexit decision was changed as a
result, then Owen’s arguments about a large section of the
population losing faith in democracy would perhaps still apply.
However it seems to me the rationale for holding a second referendum
is overwhelming. In the first referendum, what leaving would entail
was very unclear. In particular, we did not know what the divorce
bill would be, and what the economic implications would be.
Information is crucial
in voting decisions. We now know much more, and therefore it seems
only right that people should be allowed to change their minds. We
are familiar with the idea of requiring new information to reopen
issues in other contexts, so why not for a referendum.

To argue that the
1975 referendum over joining was a once in a generation event is
irrelevant, because by then the nature of the deal was clear. Why
should the fact that Cameron or anyone else said this would be a once
in a generation vote bind parliament? The bottom line has to be that
if Leave cannot win two votes just a few years apart then we should
not be leaving. Remember the first referendum had an electorate
chosen to keep the Brexiteers happy, and likewise it had no super
majority. To argue that we have to respect the first referendum to
uphold faith in democracy and at the same time argue that to hold a
second referendum would be undemocratic seems a bizarre, and very
worrying, notion of democracy.

During the
vote on whether to leave in 2019, there is a vote to remain in the
EU without a second referendum

Here the referendum
would have been overruled by parliament. Owen has two, related
arguments why this would be wrong. First, both government and
opposition said that they would be bound by the referendum result.
Second, the people will have been overruled by parliament. On the
first, I agree that any MP that said their vote would be bound by the
referendum and then went against that has some explaining to do. But
an explanation along the lines of ‘I had no idea how bad Brexit was
going to be’ sounds reasonable to me. MPs, like people, are allowed
to change their minds.

I also cannot see
why pledges by the government and opposition have to bind MPs who did
not so pledge. This gets back to the nature of our representative
democracy. Although Owen does not think much of people, like me, who
keep noting that the referendum is advisory, this does express the
fact that parliament is sovereign. We live in a representative
democracy. People may be upset to learn that, but it is true. Ed
Miliband was right to rule out holding a referendum. Just because
Cameron chose to hold one to appease his right wing should not bind
the actions of MPs.

The fact that the
referendum result was achieved as the result of a completely
inadequate campaign matters. The Remain side (and the media) failed
to adequately put across their case, because the positive case for
immigration was not made. The Leave side lied their socks off. To
equate the dishonesty on the Remain side with that of the Leave
campaign, as Owen does, is quite wrong. Two central planks of the
Leave case, that the NHS would have more money and that Turkey was
about to join the EU, were complete lies. The main plank of the
Remain campaign that Brexit would reduce the real income of UK
citizens has been shown to be true. Information matters.

If such a vote was almost certain to fail because it lacked the backing of enough Conservative MPs, then there might be a tactical reason for not supporting it for reasons I outlined here. But this is not the case that Owen makes. Barry Gardiner has also departed radically from this script. As I said in that post I did not know if Labour's Brexit position was strategic or just confused and conflicted, and Owen's piece together with these recent developments reinforce such doubts.

The
government fails to negotiate a deal but wants us to leave despite
this. There is a vote in parliament to revoke Article 50 and not leave the EU.

If you remain
unconvinced by the above, consider this outcome. No deal would be a
disaster, and bring immediate chaos. But all of Owen’s arguments
for respecting the referendum would still apply! Would Owen really argue that Labour should not support such a vote for the sake of
Leave voters’ faith in democracy? If it did that it would be complicit in the chaos that followed.

Owen keeps coming
back to the impact of any decision on how those who voted Brexit
would feel. In this sense he is in the same spirit as John Harris’s
article that I discussed here.
It is an utterly defeatist argument: we must let people harm
themselves because only then might they learn that they were
mistaken in what they wanted. A much more progressive policy is to persuade people they are wrong.

If Labour
did form the next government, as I very much hope it would, the
consequences of leaving the Single Market would be on its watch.
Would those who voted Leave forgive slow growth in
their living standards as their own fault for wanting Brexit? Would
they accept the implications of low immigration for the public
finances as a price worth paying to control immigration. Of course
not. Much of the media would argue that these problems were all down
to the Labour government, not Brexit. A Labour government that
presides over leaving the Single Market could be a one term
government.

In an earlier post I
talked about the logic of a triangulation strategy for Labour, but I
said at the outset that I did not know if this what they were doing.
As a result, there is currently a serious danger that Labour would
squash any attempt from the Tory backbenches to hold a second
referendum, or if they won the next election that they would leave
the Single Market. Although everyone focuses on Corbyn, this is as
much a problem with many Labour MPs in Leave voting areas. It is an
area where we need the membership to influence Labour policy, as both
Jeremy Corbyn and Owen Jones have always suggested they should.